Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

The Versatility of Life Insurance for Business Owners

The Versatility of Life Insurance for Business Owners

Life insurance can be used to protect you and your business in several ways. First and foremost, it provides the capital your family will need to meet their immediate cash needs and income needs. Your life insurance coverage should be sufficient to fully replace the value of the business as an income generator for your family, and it should cover all obligations you have, such as debt and college funding.

Key Person Replacement

Life insurance is also essential for the business as protection from the loss of a key employee without whose particular expertise, skills, or goodwill the business would suffer. Essentially, the business takes out a policy on the life of the key person. The death benefit is payable as a lump sum, tax-free, and can be used to replace lost cash flow as well as fund the person’s replacement.

Fund a Cross-Purchase Agreement

If you are a partner in a business, life insurance is essential to protect the business in the event of a partner’s death. The capital available from life insurance can be used to buy the partner’s business interest from his or her family. Otherwise, the family could insist on the sale of the business to receive their interest. The life insurance proceeds can also be used to replace lost cash flow or goodwill as well as the partner’s replacement if needed.

Fund a Deferred Compensation Incentive Plan

Life insurance can also be used to informally fund a deferred compensation plan. Smaller businesses are often disadvantaged when it comes to attracting and retaining the high-caliber talent needed to compete in the marketplace. By offering structured incentive plans, such as a deferred compensation plan, a smaller business might be able to keep a key person in place and motivate them to a higher level of performance. Life insurance’s unique properties allow for the tax-free accumulation of savings or investment funds that can be accessed, tax-free, at retirement. When used in conjunction with other business purposes such as key person insurance or in a buy-sell arrangement, life insurance can efficiently address multiple needs.

On the surface, life insurance is a simple concept – an exchange of future capital for a small current premium. However, when used to address business needs, additional tax and legal implications need to be considered. Structuring a life insurance policy within specific business arrangements requires careful planning and implementation to avoid adverse tax consequences and ensure optimal use of the policies. It is always advisable to discuss your specific needs with an insurance professional.

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